Buy into JD Sports' European foray

JD Sports' earnings upgrade

Fashion retailing is a competitive industry to be in, but compared with its closest rival Sports Direct International (SPD), JD Sports is a clear winner. Still, management has seen fit to remind investors that the sales growth rates seen over the past couple of years are "unlikely to continue indefinitely". But growth should nevertheless be impressive given the investments the company has made in areas such as multichannel sales and improved buying and merchandising.

For now, the company's main growth initiative is its European expansion plan. So far, the European business - one-fifth of first-half sales - is said to be going well, although there has been some short-term impact on margins due to the weak euro. By the start of August 2015 the company had 84 operating outlets - a net increase of 27 - across mainland Europe and had subsequently opened two new sites in Belgium. A flagship store was also due to open in Amsterdam as the company expands the brand across the Netherlands. The mixed consumer backdrop in Europe may be a concern for some, but management says sales are in line with expectations and largely match the like-for-like performance recorded in the UK.

Back on home soil, JD's bosses haven't forgotten about the company's struggling outdoor business, which is starting to recover. The Blacks, Millets and Ultimate Outdoors brands are now under a common, single leadership and there's better engagement from managers over merchandising. The division reported contracted losses of £4.5m during the six months ended 1 August 2015 (from losses of £5.6m in 2014), and a significantly improved performance is expected during the 2016-17 financial year, too.

Finally, one can't forget how cash generative JD Sports is. At the end of the first half the company had net cash of £100m, which was up from £11m a year earlier. Most of the money has been earmarked to fund future expansion and working capital requirements. We're encouraged by this as the best use of a company's surplus funds is always to invest in profitable growth, if genuinely high-return opportunities exist. However, it's also a good sign that JD lifted the half-year dividend by 4 per cent, although its shares are no yield play.

Interestingly, the company recently announced it would not persist with an overhaul of its IT systems. While this will lead to a write-off in the current year of around £12m, the company believes developing its existing systems will provide a cheaper and lower-risk solution.